Here's What's Concerning About Sreeleathers' (NSE:SREEL) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Sreeleathers (NSE:SREEL) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Sreeleathers is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.086 = ₹370m ÷ (₹4.4b - ₹114m) (Based on the trailing twelve months to March 2024).

So, Sreeleathers has an ROCE of 8.6%. On its own that's a low return, but compared to the average of 6.0% generated by the Retail Distributors industry, it's much better.

Check out our latest analysis for Sreeleathers

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sreeleathers' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sreeleathers.

What Can We Tell From Sreeleathers' ROCE Trend?

On the surface, the trend of ROCE at Sreeleathers doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 8.6%. However it looks like Sreeleathers might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Sreeleathers is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 33% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

If you want to know some of the risks facing Sreeleathers we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

While Sreeleathers may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.